Merrill's troubles anger BofA
Forget the culture clash that was expected in Bank of America's acquisition of Merrill Lynch, which was completed at the start of this month.
BofA executives are livid about the true depths of the problems at Merrill, which they feel were glossed over last fall in Merrill's rush to find a saviour.
BofA's discovery last month of the staggeringly weak condition of Merrill's balance sheet not only threatened to derail the landmark transaction before it closed, but raised hackles at BofA headquarters in North Carolina, where executives are wondering whether they were sold a pig in a poke.
The issue is coming to a head this week, as BofA seeks to make good on a government pledge to funnel billions of dollars in extra aid to the bank in order to make the transaction financially worthwhile.
BofA's all-stock deal to acquire Merrill, struck during a frenzied weekend of negotiations in midSeptember, was valued at $50bn, based on BofA's share price at the time.
By the time the transaction closed, BofA's share price had more than halved, valuing the deal at less than $20bn.
But after learning last month that Merrill's fourth-quarter performance would be far worse than expected, Ken Lewis, BofA's chief executive, dispatched a team of lawyers to determine whether Merrill's numbers were so bad as to constitute the "material adverse conditions" required to scuttle the deal.
After informing the government that it would break up the deal unless it received financial aid, and after receiving a commitment for such aid, BofA closed the transaction this month.
Since then, people close to the situation say Mr Lewis has been at odds with John Thain, former chief executive of Merrill Lynch and now head of global banking, securities and wealth management at the combined firm, about whether the bank's fourth-quarter results, scheduled to be released today, should be broken out to show how weak Merrill's performance was. Merrill said there had been no such disagreement.
Such a break-out could prove embarrassing to Mr Thain, since it would expose weaknesses in the firm's sales and trading operations.
Merrill's performance would also reflect badly on Tom Montag, an ally of Mr Thain, who was hired from Goldman Sachs last year and given a lucrative contract that paid out more than $39m following the BofA acquisition.
Tension between Mr Lewis and Mr Thain, which had simmered through much of the fourth quarter, spiked dramatically in early December when it was revealed that Mr Thain had formulated plans to ask Merrill's board of directors for a bonus of more than $10m.
When he first learned of the plan, Mr Lewis was said to have been "purple-faced" with rage, according to an executive in North Carolina. Merrill denied Mr Thain had even sought such a bonus and said Mr Lewis had been kept informed of the matter.
On December 8, after the planned bonus request was leaked to the press, Mr Thain told Merrill's board that neither he nor his top management team wanted a bonus for the year.
Nevertheless, Mr Lewis and other top BofA executives were blindsided and felt they had been misled by Mr Thain, according to someone familiar with the matter.
The concern felt by Mr Lewis only intensified when he learnt how badly Merrill's performance was in the last quarter of 2008. Excluding the top five managers, Merrill paid bonuses to many of its executives and employees last month, although not to Mr Montag.
While the bonus pool was significantly smaller in 2008 than in 2007, any such payments could come under scrutiny if it turns out Merrill was technically insolvent at the time the BofA deal closed.
The latest developments threaten to undermine the leadership positions of Mr Lewis and Mr Thain. Mr Lewis, who has wanted to buy Merrill for many years, is likely to come under fire from shareholders who think he overpaid for the bank.
At a meeting this week, one investor challenged him on the subject, suggesting when he made the offer in September, Mr Lewis was thinking with a body part other than his brain.
As for Mr Thain, Merrill's performance is unlikely to enhance his reputation as "Mr Fix-It."
By Greg Farrell FT.com
Comments(0)